Grain Spreads

Sean LuskGeneral Commentary

Soy Complex

Soy meal has led the complex higher at the expense of bean oil as beans and meal reversed off of weekly support levels to surge higher into the weekend. The rally or pivot higher from the mid-week lows comes on two fronts in my view. First, Argentina who is the worlds largest crusher of beans has made their second purchase of US beans this month. The last time they made purchases was over 20 years ago as reported by a few news services. With their bean crop reported down twenty million metric tons or 35 percent from previous estimates back in January, their lower production has given thoughts to end users or commercials being short bought. At least that could be the fear. Trend and Index following funds took note and bought trend line support in July beans off of 10.29 and meal down at 373 on the news in my opinion. The second reason in my view was an event that entered into the market. A vessel down in Argentina collided with their largest export dock shutting down the facility for several weeks if not months. This logistical nightmare was one of a series of events that entered into the market that are causing a potential slowdown to processing grain exports for shipment out of Argentina. Meal rallied 25.00 short tons from low to high this week while beans rallied just over 30 cents.  Should we continue higher look at potentially buying old crop /new crop bean spreads as this is where I see value should the rally continue.

Trade: Buy the July 18/Nov 18 bean spread at 9 cents over. Stop loss at 3 cents, risking 6 cents from entry. Looking for a rally to 21 cents July over. If that level gets taken out the market could push to 29 over.

Wheat/Corn

Corn has willing buyers from managed money to speculator buying. I can detail many reasons why I think the trade is long, but better than expected demand out of China during the first quarter and lower crop sizes out of South America are two that immediately come to mind. While US corn planting numbers regarding acreage are coming in lower coupled with later planting dates has given thoughts to not only lower possible production but a sizable cut of 20 to 30 percent in ending stocks later in 2018. Lots of question marks which has therefore limited any major erosion in price so far. KC and Chicago wheat gained on corn this week as forecasts in the western wheat belt turn dry again in key areas. Like corn, the worry or unknown is what future ending stocks will look like if production estimates come in lower than previously thought. Currently they sit at a billion for all wheat but could get slashed 20 to 30 percent due to winter wheat production at or near historic lows. Again unknowns here but the trade will get a better idea next week as crop tours will begin in the winter wheat areas. We also have the supply demand report from the USDA on May 10th. Should KC wheat keep moving higher look for it to trade up to 1.56 over corn. We settled today at 1.32 KC over basis July. If looking to buy be out on a close under 1.21 or a KC wheat close under 5.06.

Trade Idea Corn/Wheat: Those looking to take a shot consider the following. Using two different months in corn for this option trade:

Buy the Sep 430 call for 16 cents. Sell 2 August 380 puts for 7.4 collecting 15 cents. Spread cost 1 cent plus commissions and fees. If Sep corn closes below 3.88, exit all positions.

KC wheat strangle: buy the June 490 put for 4 cents OB. Buy the June 550 call for 10 cents and sell the July 6.00 call for 8 cents. 2 cent debit. (In my view the trade will have a better idea what this KC wheat crop is or isn’t prior to June Option expiration.)

Call or email with questions or comments on any spread relationship you are looking at and we can study it for you and give you some levels to consider. I can be reached at 888 391 7894 or slusk@walshtrading.com

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